Mild recession likely, Morgan Stanley says

[zoog]

WASHINGTON (MarketWatch) -- The U.S. economy is likely to slip into a mild recession in 2008, said economists at Morgan Stanley, which is the first major Wall Street firm to predict a recession.

I guess things are getting so bad now that even Wall Street is starting to think we might have a recession.:rolleyes:

Domestic demand is expected to fall 1% annualized over the next three quarters with zero growth in gross domestic product and a 5% to 10% drop in corporate earnings, said chief economist Richard Berner and U.S. economist David Greenlaw in an updated forecast on the firm's Global Economic Forum Web site. For the full year, Morgan Stanley sees 1% growth.

The new forecast from Morgan Stanley is significantly more pessimistic than the average forecast of top economists. Other economists are forecasting growth of 2.2% in 2008, according to the Blue Chip survey of 51 economists, also released Monday.

Lots of goldilocks out there still, I see. By the way, I hadn't seen this one before: sogflation = "growth soggy, inflation strong"

The Federal Reserve will likely cut the federal funds rate by a total of one percentage point over the next seven to nine months, reacting to a tightening in credit conditions, a slump in business capital spending and a slowdown in global growth, Berner and Greenlaw said.

I'm expecting more than that. There's six scheduled FOMC meetings in the next nine months. Anyone think a meeting will go by when they don't cut the federal funds rate?

"Those negatives sound like the recipe for a serious recession, so why do we think it will be mild?" Berner and Greenlaw wrote. "Although it is slowing, global growth is still strong, and we expect that net exports will add about 3/4 percentage point to growth through the end of 2008. In addition, we think that corporate capital and hiring discipline in this expansion mean that there are no business-investment or labor-market excesses to unwind, adding to U.S. economic resilience."

A bit of fancy, there?

"Consumers still face what could be a perfect storm," they wrote. Job growth has slowed, home prices will fall further and energy prices are high.

There's little prospect for a recovery in housing anytime soon, they said. "We think overall housing starts will run below 1 million units in each of the next two years -- a level not seen in the history of the modern data since 1959."

So far I think that's the most likely piece of their entire prediction.

The two economists acknowledged that "things may be better on Main Street" than they are on Wall Street, where firms have been forced to take tens of billions of dollars of write-offs on securities based on mortgages. But "downside risks still dominate."

Oh, sure they are. We're doing swell down here in the real world.

[Uncle Jack]

Re: Mild recession likely, Morgan Stanley says

"We think overall housing starts will run below 1 million units in each of the next two years -- a level not seen in the history of the modern data since 1959."

When you think about the population growth since then, this statement is sobering. In another post (http://www.itulip.com/forums/showthread.php?t=2640) there was a video of Kennedy bashing the steel industry for raising prices. In that video he made mention of the 1962 U.S. population being 185 million people. We're over 300 mil now. So housing starts dropping to 1959 levels is a monstrous drop.

[zoog]

Re: Mild recession likely, Morgan Stanley says

When you think about the population growth since then, this statement is sobering. In another post (http://www.itulip.com/forums/showthread.php?t=2640) there was a video of Kennedy bashing the steel industry for raising prices. In that video he made mention of the 1962 U.S. population being 185 million people. We're over 300 mil now. So housing starts dropping to 1959 levels is a monstrous drop.

Agreed, but according to data from http://research.stlouisfed.org/fred2/data/HOUST.txt , looks like it has dropped below a million new starts before. Current decline started January 2006.

[Uncle Jack]

Re: Mild recession likely, Morgan Stanley says

Thanks for the chart, and it goes to making EJ's point that the housing market will take a long time to recover in spite of today's "good" news on pending home sales. The market topped out in 1978 and late 1980s, and both of those instances took about 7 years for prices to recover. During this latest real estate craze price appreciation rose to unprecedented levels, so there is no way, no way we recover in less than five years, or now.

[GRG55]

Re: Mild recession likely, Morgan Stanley says

Thanks for the chart, and it goes to making EJ's point that the housing market will take a long time to recover in spite of today's "good" news on pending home sales. The market topped out in 1978 and late 1980s, and both of those instances took about 7 years for prices to recover. During this latest real estate craze price appreciation rose to unprecedented levels, so there is no way, no way we recover in less than five years, or now.

Adding to the above observations, the important take-away for me from zoog's (and other similar charts on iTulip) is the extraordinarily long ramp up in housing starts from the 1991 low. Much longer than previous cycles. And therefore a big contributor to the inventory overhang that has to now be worked off?

[Spartacus]

Re: Mild recession likely, Morgan Stanley says

Is this chart for real?

Makes no sense to me, just on a logistics and business level

The housing industry in the US in 1971 must have been far, far smaller than in 2005 yet managed to do many, many more housing starts? How does that work?

Put another way, with bidding wars on both coasts and many points in between, in 2005 all the housing companies couldn't do as many starts as in 1971?

Agreed, but according to data from http://research.stlouisfed.org/fred2/data/HOUST.txt , looks like it has dropped below a million new starts before. Current decline started January 2006.

[Mega]

Re: Mild recession likely, Morgan Stanley says

There is NO such thing as a "Mild" recession!
Mike

[zoog]

Re: Mild recession likely, Morgan Stanley says

Is this chart for real?

Makes no sense to me, just on a logistics and business level

The housing industry in the US in 1971 must have been far, far smaller than in 2005 yet managed to do many, many more housing starts? How does that work?

Put another way, with bidding wars on both coasts and many points in between, in 2005 all the housing companies couldn't do as many starts as in 1971?

I just make the pretty pictures.;)

Although the original data page (in the link) does not go into great detail, these appear to be total monthly housing starts, not a cumulative total.

Here is another chart, comparing the new housing starts with new houses sold. Sure to make your head spin even more, as sales never even come close to starts at any point. Seems to imply an enormous quantity of new, empty houses building up over decades, although at some point these houses must be considered "existing" homes at point of sale.

Sorry I don't have any confident explanations.:confused:

[jk]

Re: Mild recession likely, Morgan Stanley says

perhaps "housing starts" includes multifamily housing, apartments, etc. the other graph is specifically single family units.

[Spartacus]

Re: Mild recession likely, Morgan Stanley says

I just make the pretty pictures.;)

Here is another chart, comparing the new housing starts with new houses sold. Sure to make your head spin even more, as sales never even come close to starts at any point.

No, that doesn't surprise me - I don't expect starts to come anywhere near sales.

starts is some level of paperwork and other commitments, but far, far short of ready for sale.

I'm just curious about those 1971-73 numbers, and whether there perhaps have been statistical adjustments.

JK's point was also one of the things I considered - in the early 70s I believe there were a lot more apparment buildings being planned, Maybe each apartment counted as a "start" , and in more recent history consumer tastes have shifted to demand housing, not apartments.

[zoog]

Re: Mild recession likely, Morgan Stanley says

No, that doesn't surprise me - I don't expect starts to come anywhere near sales.

starts is some level of paperwork and other commitments, but far, far short of ready for sale.

I'm just curious about those 1971-73 numbers, and whether there perhaps have been statistical adjustments.

JK's point was also one of the things I considered - in the early 70s I believe there were a lot more apparment buildings being planned, Maybe each apartment counted as a "start" , and in more recent history consumer tastes have shifted to demand housing, not apartments.

Sounds reasonable. Also, the numbers are "Seasonally Adjusted", which I have come to associate with "Wildly Inaccurate".:rolleyes:

[GRG55]

Re: Mild recession likely, Morgan Stanley says

No, that doesn't surprise me - I don't expect starts to come anywhere near sales.

starts is some level of paperwork and other commitments, but far, far short of ready for sale.

I'm just curious about those 1971-73 numbers, and whether there perhaps have been statistical adjustments.

JK's point was also one of the things I considered - in the early 70s I believe there were a lot more apparment buildings being planned, Maybe each apartment counted as a "start" , and in more recent history consumer tastes have shifted to demand housing, not apartments.

I have a faint recollection of reading somewhere that housing starts is all homes including those being built under contract before permit application, whereas sales excludes those homes.

In other words if you decide you wish to build a home and hire a contractor to build it for you (or build it yourself, which seems rather quaint these days, eh) your still get included in the stats keying off building permits, but never in sales.